Understanding Employment Contracts and Policies in Churches: Case Studies

Most churches have adopted employment policies, either in a policy manual or as individual policies. Examples include policies addressing:

For many churches, policies change. Additions and modifications are common. Church leaders often assume that additions and changes automatically apply to current as well as future employees. But this often will not be the case, due to a fundamental requirement of contract law called “consideration.” In order for a contract to be enforceable, each party must receive something of value (“consideration”) in exchange for his or her commitment. To illustrate, if X and Y enter into a contract for the sale of X’s home, the consideration for X’s commitment to sell the home is the price to be paid by Y. And, the consideration for Y’s promise to pay the purchase price is the home itself. The requirement of consideration is what distinguishes contracts from gifts. In a gift, the recipient receives the benefit of the donated property without any value provided in return to the donor.

In the employment context, the commitment by employees to be bound by an employer’s employment policies requires that they receive something of value in exchange for their commitment. When employees are hired, the fact of employment can constitute valid consideration for their commitment to be bound by the employer’s employment policies, especially if this is properly articulated in documentation signed by the employees. But, many courts have concluded that current employees must be provided something of value other than continued employment in order to be bound by the terms of a new or amended employee policy.

A recent case in Pennsylvania illustrates this point.

A company (the “employer”) hired a salesman (the “plaintiff”) in 2007. In 2010, he was asked to sign a new employment contract containing a covenant not to compete with the employer for two years after the termination of his employment in several nearby states.

In 2012, the plaintiff resigned his position, and a few weeks later he accepted a position with a competitor. The employer sent a letter to the new employer, attaching the non-competition agreement and threatening litigation. Ten days later, the new employer terminated the plaintiff’s employment.

The plaintiff sued his former employer, claiming that the non-competition agreement was unenforceable because it was not supported by sufficient consideration. The employer acknowledged that the non-competition agreement was signed during the course of the plaintiff’s employment, and that the plaintiff did not receive a benefit or beneficial change in his employment status in exchange for signing the agreement. Instead, the employer argued that the non-competition agreement contained the language “intending to be legally bound,” and this prevented the avoidance of any written agreement for lack of consideration.

The trial court ruled in favor of the employee. It concluded, “Where a restrictive covenant is executed after the commencement of employment, it will not be enforced unless the employee restricting himself receives a corresponding benefit or change in status. The parties agree that the plaintiff received no additional benefit or any change in employment status. The court finds the non-competition agreement is invalid for want of consideration.”

A Pennsylvania appeals court affirmed the trial court’s ruling. It concluded:

The court stressed that “while the existence of consideration is a necessary element for any enforceable contract, the adequacy of the consideration is not a factor to be considered in determining the validity and enforceability of a contract.” However, the court noted that in the case of non-competition agreements, the courts will examine the adequacy of consideration to support them: “The reasons for this differing approach are clear, as restrictive covenants are disfavored because they are in restraint of trade and may work significant hardships on employees agreeing to them. For these reasons … only valuable consideration will support their enforcement [excluding] various forms of consideration that would support the enforcement of other types of contracts, including the benefit of the continuation of at-will employment and nominal consideration.” Language in an employment contract that the parties intend to be legally binding “does not constitute valuable consideration in this context.” Socko v. Mid-Atlantic Systems, 2014 WL 1898584 (Pa. Super. 2014)

This case is important for two reasons:

(1) The requirement of consideration

First, it illustrates the importance of the contractual requirement of consideration. Unfamiliarity with this requirement can result in some or all of a church’s policy manual being unenforceable against some employees.

The court concluded that continued employment generally will not be regarded as sufficient consideration to support employees’ agreement to be bound by a new employer policy. They must receive new consideration. However, many employers have employees sign an agreement, at the time of hire, binding them to the current policy manual and any future amendments. Few courts have addressed this question, and the results may vary depending on state law. Before using this technique, be sure to consult with legal counsel in your state.

The requirement of consideration can arise in several contexts, making purported “agreements” nonbinding. Several examples of actual cases are summarized below.

Case study 1. A Tennessee court ruled that a church’s decision to make biweekly payments to a former pastor’s widow was unenforceable since the church received nothing of value (“consideration”) in return for its commitment, and therefore the church’s decision to discontinue making the payments did not amount to a breach of contract. In 1981, Pastor Dave began his tenure as senior pastor at a Baptist church (the “church”). He served in this capacity until his death in 1995. In return for his services, the church paid Pastor Dave a salary, as well as various fringe benefits, such as cell phone services, lawn services, and vehicle maintenance. At Pastor Dave’s request, the church orally agreed to provide most of these benefits directly to his wife (Darla). Before his death, Pastor Dave spoke to several deacons of the church and asked the church to provide for his wife if the church was able to do so. The church responded by entering into an agreement with Darla in which it agreed to provide her with $785 on the first and third Sunday of every month until 2010 and would provide lawn services for her residence. Pursuant to the agreement, Darla would receive these benefits until one of two terminating events occurred: (1) her death; or (2) she remarried. However, if she remarried within five years of the inception of the contract, she would continue to receive these benefits for five years. If she remarried after five years, she would no longer receive any benefits.

In 1996, the church discontinued making payments to Darla, and she sued the church and the entire board of deacons seeking damages for breach of contract. A trial court dismissed all of Darla’s claims on the ground that the church’s obligations under the “contract” were unenforceable because it had not received any “consideration” from Darla in return for its obligations. It is a basic principle of contract law that a party’s obligations under a contract are not enforceable unless the party received something of value (called “consideration”) in return for those obligations. The trial court concluded that the church had received nothing of value from Darla in return for its substantial commitments under the contract, and therefore those commitments were unenforceable. This meant that the church was legally justified in terminating its payments to Darla.

On appeal, Darla insisted that the church’s obligations under the contract were enforceable because she had, in fact, provided the church with consideration. She cited (1) her presence at the church as “first lady” of the church; (2) her loss of benefits previously received from the church; and (3) her decision not to remarry. The appeals court rejected all three of these grounds.

“First lady” of the church
In rejecting Darla’s first theory of consideration, the court noted that there was no evidence that the church benefited from her presence. She “did not take on any additional responsibilities with the church nor promise to continue her activities with the church. If she chose to no longer attend the church as a member, she would still be eligible for the benefits conferred to her pursuant to the terms of the agreement. Accordingly, her mere presence at the church does not constitute consideration.”

Loss of prior benefits
Darla also pointed out that church leaders orally agreed, at her husband’s request and during his lifetime, to provide her with various fringe benefits, such as cell phone services, lawn services, and vehicle maintenance. She claimed that she “gave up” these benefits when she entered into the written agreement with the church, and that this relinquishment of benefits constituted consideration in support of the church’s obligations under the written agreement. The court disagreed, noting that for this loss to constitute consideration, Darla must have had a vested right to the benefits at the time the written agreement with the church was executed. It pointed out that the previous benefits were provided to her as a result of her husband’s employment contract with the church, so for Darla to have had a vested right to the benefits conferred to her, she must have been an intended beneficiary of her husband’s employment contract.

To establish that she was an intended beneficiary of the employment contract between the church and her husband, Darla had to establish that the employment contract was valid, and demonstrate a “clear intent to have the contract operate for her benefit.” The court conceded that the employment contract was valid, but concluded that there was no clear intent that the employment contract between her husband and the church would operate for her benefit. Further, when Pastor Dave died, all vested rights within that contract expired, meaning that Darla gave up nothing when she later signed her own agreement with the church. Therefore, “since Darla had no rights to the benefits conferred to her, her subsequent relinquishment of those benefits cannot constitute consideration.”

Refusal to marry
Darla pointed out that the provision in her agreement with the church forbidding her to marry in order to remain entitled to benefits constituted sufficient consideration supporting the church’s obligations under the agreement. The court disagreed. It noted that restraints upon marriage are void as a matter of public policy, and cannot serve as consideration.

This case illustrates an important legal principle. Commitments made by churches to current or former employees, or their spouses, may not be legally enforceable if the church receives nothing of value (consideration) in return for its commitments. There are some exceptions to this rule, such as the doctrine of promissory estoppel, but these will not be available in all cases. Cochran v. Robinwood Lane Baptist Church, 2005 WL 3527627 (Tenn. App. 2005).

Case study 2. A Pennsylvania court addressed the issue of whether a church acted properly when it dissolved due to declining attendance, sold its assets, and transferred most of the sales proceeds to the pastor as compensation for wages that it was previously unable to pay.

A church was established in 1902. In 1999, the church hired a new pastor with a starting weekly salary of $150, out of which $90 was treated as a non-taxable housing allowance. The pastor subsequently received periodic salary increases and, eventually, his entire salary was treated as a housing allowance. He was also paid separately for his maintenance work. As of 2008, his annual salary was $17,930. In 2007, 13 members of the church’s congregation unanimously approved the revision to the church’s constitution to provide that “in the event of the dissolution of this corporation, all of its debts shall be fully satisfied, including any compensation and benefits due to its Pastor.”

At an annual congregational meeting in 2008, eight voting members of the church, including the pastor and his wife and two children, voted to dissolve the church and sell the church’s property. They also adopted a motion by the pastor’s son to compensate the pastor for his past service after the sale of the church’s property. A committee formed to determine the amount of compensation for the pastor proposed to pay him up to $635,000. Between 1999 and 2008, the church’s annual income ranged from $26,474 to less than $35,000.

Later that year, the pastor and his wife and son signed an agreement to sell the church’s property to another church for $750,000. A week later, six remaining voting members (including the pastor and his wife and two children) unanimously voted to dissolve the church and approved the compensation package for the pastor. After receiving a net amount of $690,000 from the sale of the property in 2009, and pursuant to the procedure for dissolving a nonprofit corporation described in the state nonprofit corporation law, the church asked a court to approve its proposed distribution of the proceeds from the sale of its assets. The church informed the court that it “owed its pastor and other employees compensation for periods of time when they were uncompensated due to the church’s financial struggles.”

The state opposed the proposed distribution of the church’s assets on the grounds that the church failed to seek the court’s approval prior to the sale of its assets, and by voting to approve the compensation package, the pastor and other members of the church board violated a fiduciary duty imposed by the nonprofit corporation law and engaged in “self-dealing to inure benefits to private individuals.”

The court concluded that the pastor’s claim for compensation for his past service would be unenforceable under contract law. It noted that contracts, to be enforceable, must be supported by “consideration,” meaning that both parties must receive something of value in exchange for their commitments. The court noted that the church’s commitment to pay the pastor $635,000 in back wages was unenforceable since “past services” are never valid consideration for current obligations and commitments. As a result, the court concluded that payment of additional sums to the pastor in excess of his specified salary would constitute a gift, which would be inconsistent with the charitable purposes of the church.

This case addresses a question that often arises when a small, struggling church dissolves, sells its assets, and transfers the proceeds to its pastor or, in some cases, other employees or directors. In many such cases, the justification for distributing the proceeds from the sale of church assets to the pastor is that he or she was not “adequately compensated” in the past and this is a way make amends. But as the trial court in this case noted, such dispositions of the proceeds from the sale of church assets have a number of potential legal and tax consequences. In re First Church, 2011 WL 2302540 (Pa. Common. 2011).

Case study 3. An Indiana court ruled that an Archdiocese was not liable on the basis of breach of contract for reducing the amount of counseling fees it paid on behalf of a woman who had been sexually molested by a priest when she was a minor.

In 1999, a 37-year-old woman (the “plaintiff”) and her husband met with several officials of a Roman Catholic Archdiocese to discuss alleged sexual abuse of the plaintiff by a priest when she was a minor. During the meeting, church officials discussed the Archdiocesan policy that provides for the payment of counseling fees and therapy sessions for victims of childhood sexual abuse. A few months later, the plaintiff and her husband again met with church officials and made a demand for $200,000 to compensate for her injuries. In response, the Archdiocese denied liability, but its representatives again explained that it would pay for the plaintiff’s out-of-pocket counseling and treatments. The Archdiocese wrote a letter to the plaintiff indicating that it would pay for therapist and counseling fees as a result of “abuse by a minister of the church.” At some point, the Archdiocese received treatment plans from the plaintiff’s medical providers, and began making payments to them in accordance with church policy. The entire amount of each provider’s bill was paid based on the plaintiff’s representation that she had no health insurance and that she, personally, had paid 100 percent of those expenses. The Archdiocese continued to pay the plaintiff’s counseling fees for many years. On at least one occasion, the church rejected the plaintiff’s claims for additional compensation, but it continued paying her counseling and therapy expenses.

Eight years later, the Archdiocese became concerned that the plaintiff had been in treatment for several years, but, apparently, the treatment plans demonstrated no signs of recovery. As a result, the Archdiocese contacted the plaintiff’s providers and inquired about the treatment plans and the possibility of limiting future payments. A letter from the Archdiocese stated, among other things, that after paying fees of nearly $100,000 for the plaintiff’s care over a period of eight years, a new plan should be implemented. That provider agreed to begin a reduction in the frequency of the plaintiff’s therapy sessions. The Archdiocese mandated that the plaintiff’s psychotherapy sessions be reduced from twice weekly to one session per month.

After the reduction in her counseling sessions, the plaintiff sued the Archdiocese, alleging, among other things, that the Archdiocese was in breach of contract. The plaintiff asserted that the reduction in the therapy sessions was against the medical advice of her psychiatrist and therapist. As a result, she maintained that, as a consequence of the Archdiocese’s breach of its agreement to pay for necessary therapy, she suffered pain and suffering, mental anguish, and increased medical expenses. She further claimed that the Archdiocese breached its fiduciary duty to her by failing to fulfill its alleged unconditional promise to pay for her psychological testing in accordance with its own written church policy. As a result, the plaintiff maintained that the Archdiocese should be compelled to continue to pay the amounts that it had initially and voluntarily agreed to make.

A trial court dismissed the case on the ground that the Archdiocese had no legal responsibility to continue paying all of the therapy costs. Instead, it was voluntarily paying for the counseling sessions out of a “moral obligation” to do so. A state appeals court agreed. The court acknowledged that the Archdiocese had a “Policy on Care of Victims of Sexual Misconduct” that provided for “appropriate counseling and spiritual direction, as needed” for victims of sexual abuse. However, a portion of the Policy makes it clear that:

The court noted that one of the requirements of an enforceable contract is “consideration,” meaning that each party receives something of value from the other party in exchange for its agreement to do something. And “a moral obligation to perform an agreement does not provide sufficient consideration to support the enforcement of an agreement nor does it create an enforceable contract.” In this case, “while the letters that the Archdiocese sent to the plaintiff express an intent to assist her with counseling costs, that correspondence does not amount to a contract to provide her unlimited care and treatment at its expense. Therefore, the designated evidence establishes that there was no enforceable contract in this instance, and the plaintiff’s claim fails on this basis.”

The court concluded that the pastor’s claim for compensation for his past service would be unenforceable under contract law. It noted that contracts, to be enforceable, must be supported by “consideration.”
“To be enforceable, a non-competition agreement must be reasonable. In arguing the reasonableness of a non-competition agreement, the employer must first show that it has a legitimate interest to be protected by the agreement.”

The court also rejected the plaintiff’s claim that the Archdiocese breached its fiduciary duty to pay the full amount of her counseling and therapy fees. She asserted that a fiduciary relationship was created when the Archdiocese undertook a duty to pay for the therapy sessions, and the Archdiocese breached its fiduciary duty when it arbitrarily decided that it would no longer pay the entire amount of the counseling sessions. The court disagreed: “Nothing in the record supports a conclusion that there was a fiduciary relationship between Doe and the Archdiocese. The plaintiff did not place any special confidences in the Archdiocese or otherwise seek out a confidential relationship. In fact, she maintained an adversarial relationship and consulted with attorneys to provide her with guidance concerning her dealings with the Archdiocese. Therefore, because no fiduciary relationship existed, there can be no breach of fiduciary duty. As a result, the trial court properly entered summary judgment for the Archdiocese with regard to this claim.”

Churches occasionally offer to pay counseling expenses of victims of sexual misconduct. This case illustrates that such agreements may be subject to modification or termination if based entirely on moral consideration. The unique facts and circumstances of each case may alter this result, however, and so churches should never modify or terminate an agreement to provide counseling fees without the advice of legal counsel. Doe v. Roman Catholic Archdiocese of Indianapolis, 958 N.E.2d 472 (Ind. App. 2011).

Case study 4. The courts have recognized a few exceptions to the consideration requirement. One is the doctrine of “detrimental reliance.” Under the exception, an agreement may become enforceable, even without consideration, if one party relies to his or detriment on the promise of the other. This exception, often called “detrimental reliance” or “promissory estoppel,” often arises in the context of pledges to church building programs.

A synagogue’s members were assessed annual “dues” payable in three equal installments. A member of the congregation submitted a letter to the rabbi stating that he was resigning as a member. A month later, the synagogue’s finance chairman sent him a letter requesting that he remit the remaining $1,200 of membership dues that he owed for the balance of the year. The letter explained, “As a temple, we budgeted our expenses based upon your membership. While you benefited from our services when you were a member, your resignation did not relieve you of your financial obligation. We are in need of the balance of your membership dues.” The dispute ended up in court, and the court ruled that “the trend of judicial decision during the last century has been towards the enforcement of charitable pledges almost as a matter of public policy.” The court conceded that pledges, like any promise, generally are not legally enforceable unless the person making the pledge receives something of value (called “consideration”) in return. But there are exceptions to this requirement, and one of them is “detrimental reliance.” According to this exception, if a charity relies to its detriment upon the pledges of members, then those pledges are enforceable even though not supported by consideration in a traditional sense. The court applied this principle to pledges made to the synagogue.

The court also suggested that members of the congregation did receive valuable consideration in exchange for their pledges, such as worship services, and this constituted “consideration” making the members’ pledges legally enforceable. Temple Beth Am v. Tanenbaum, 789 N.Y.S.2d 658 (Dist. Ct. 2004).

Case study 5. In case study 1 (above), Darla claimed that the church’s obligations under the agreement with her were legally enforceable even without consideration on the basis of “promissory estoppel.” Under the doctrine of promissory estoppel, a party’s promises will be deemed enforceable even without consideration if they induce another party to rely to his or her detriment on those promises. Darla asserted that she relied to her detriment based on the church’s promises as set forth in the agreement, and therefore the agreement was legally enforceable even if no consideration existed to support the church’s obligations. In particular, she claimed that she “conducted her life in reliance on the benefit she received from the church.” However, the court concluded:

(2) Non-compete clauses

Second, some churches include a non-compete clause in an employment contract with a pastor or skilled employee. Such a provision may be in the church’s policy manual, or it may be included with the forms the employee signs at the time of hire. The objective ordinarily is to prevent the pastor from starting a competing church in the same community in the event of his or her dismissal or resignation.

Church leaders should understand that the civil courts are reluctant to enforce non-compete clauses since they impose restraints on personal freedom. They are enforced by the courts only if they are strictly limited in terms of both duration and geography. To illustrate, the Indiana Supreme Court has observed:

As a result, a non-compete clause in a minister’s employment contract or church policy manual that attempts to restrict the minister’s employment for too long, or for an unreasonable area, will be invalidated by the courts. Such provisions should never be adopted without the assistance of legal counsel.

While this was written to give your church some guidelines regarding contracts and agreements, it is always wise to seek professional legal counsel before making a decision regarding these matters.